state electric restructuri ng are retail w reciprocity

* J.D. Candidate, 2000, Indiana University School of Law—Indianapolis; B.A., 1993,University of Notre Dame.

1. New State Ice Co. v. Liebmann, 285 U.S. 262, 311 (1932) (Brandeis, J., dissenting).

2. See Edison Electric Institute, Retail Wheeling & Restructuring Report: State Profiles

(1998) (visited Jan. 31, 2000) <http://www.eei.org/7online/online/rwrr/profiles/_states.htm> (listing

retail electric restructuring actions taken by all 50 states) [hereinafter States Profiles].

3. See id.

4. There are constitutional challenges on both sides of many state electric restructuring

plans. There may be further constitutional challenges to these four states’ retail wheeling and

reciprocity clauses including equal protection challenges and possibly privilege and immunity

clause challenges, however, those are beyond the scope of this Note.

5. See Electric Service Customer Choice and Rate Relief Law of 1997, 220 ILL. COMP.

STAT. 5/16-101-5/17-600 (West 1997).

6. See In re Restructuring of the Electric Utility Industry, 177 Pub. Util. Rep. (PUR4th)

201 (Mich. Pub. Serv. Comm’n 1997).

7. See Electric Utility Industry Restructuring Act and Customer Choice, MONT. CODE ANN.

§ 69-8-101 (1997).

8. See Electric Restructuring Act of 1997, OKLA. STAT. tit. 17, § 190.1 (1997), and

amendments at 1997 Okla. Sess. Laws 888.

STATE ELECTRIC RESTRUCTURING: ARE RETAIL

WHEELING AND RECIPROCITY PROVISIONS

CONSTITUTIONAL?

KELLEY A. KARN*

INTRODUCTION

“It is one of the happy incidents of the federal system that a singlecourageous state, may, if its citizens choose, serve as a laboratory; andtry novel social and economic experiments without risk to the rest of thecountry.”1

These words by Justice Brandeis hold true today as states experiment onissues ranging from public welfare reform to tort reform, resisting federalmandates. So too, every state in the union is thinking about, talking about, andimplementing changes in the way its citizens will receive electric service. To2

date, twenty-four states have taken final action on “experimental” legislation orregulation that restructures the retail electric industry. 3

This Note discusses the constitutional problems states are facing as they tryto insert competition into the retail electric industry. In particular, the federalpreemption and dormant commerce clause challenges that may be made to fourstates’ electric restructuring plans are examined. Illinois, Michigan, Montana,4 5 6 7

and Oklahoma have electric restructuring plans that require the retail wheeling8

of electricity and retail reciprocity from out-of-state utilities.Retail wheeling occurs when electricity produced by one utility is wheeled

to a customer in a second utility’s service area across the power lines of the

632 INDIANA LAW REVIEW [Vol. 33:631

9. See MASAYUKI YAJIMA, DEREGULATORY REFORMS OF THE ELECTRIC SUPPLY INDUSTRY

12 (1997).

10. See id.

11. U.S. CONST. art. VI.

12. See ERWIN CHEMERINSKY, CONSTITUTIONAL LAW: PRINCIPLES AND POLICIES 307-08

(1997).

13. U.S. CONST. art I, § 8.

second utility and any intermediate utilities. Allowing or requiring retail9

wheeling at a fair and nondiscriminatory transmission price encouragescompetition in electric supply and generation. The four states’ electric10

restructuring plans require retail wheeling because without it there can be nocustomer choice of electric supplier. States must require utilities who owndistribution and transmission systems to allow nondiscriminatory open access totheir systems. Still, some argue that only the federal government has the powerto order utilities to wheel electricity in this way and that states are preempted bythe Supremacy Clause. This Note concludes that the federal government has11

not preempted the states in the area of retail wheeling of electricity. Even more controversial are the four states’ reciprocity provisions.

Essentially, if an out-of-state utility wants to serve retail customers in one ofthese four states, the out-of-state utility must allow reciprocal access to its owndistribution lines. Thus, the in-state utility whose customers the out-of-stateutility is taking away, will have an opportunity to serve customers in the out-of-state utility’s territory. In other words, “you can’t sell electricity in my territoryunless I have an opportunity to sell in yours.” The reason for this requirementis fairly obvious. For example, if Illinois is an open access state and Indiana isnot, then Indiana utilities could enter Illinois and supply electricity to the majorIllinois customers, leaving the Illinois utilities with less revenue and no accessto new customers.

Because traditional dormant Commerce Clause analysis prohibitsdiscrimination against out-of-staters, these states’ reciprocity clauses are subject12

to Commerce Clause challenges. 13

Part I of this Note gives a brief history of electricity regulation and the movefrom monopoly to competition. Part II discusses the claimed federal preemptionof retail electric wheeling. In Part III, after a brief history of the dormantCommerce Clause, the four states’ reciprocity requirements are examined undertraditional dormant Commerce Clause analysis. Then, Part III drafts a reciprocityclause that will pass dormant Commerce Clause scrutiny. Additionally, anargument that the unique nature of the electric industry requires deviation fromtraditional dormant Commerce Clause analysis is suggested. Part IV examinespossible federal solutions to the problem, including an analysis of the policyconsiderations involved.

This Note concludes that as states experiment with different policies andstructures for the retail electric industry, the federal government should step tothe side, monitor the experiments, and, when necessary, give states the powerneeded to ensure that the transition from monopoly to competition will be fair.

2000] STATE ELECTRIC RESTRUCTURING 633

14. See YAJIMA, supra note 9, at 1.

15. See id.

16. See William L. Massey, FERC at the Crossroads: Move Backward, Tread Water, or

Move Forward, POINTCAST, ENERGY NEWS, ¶ 25 (last modified Nov. 5, 1998)

<http:127.0.0.1:15841/v1? catid=20054275&md5+falc4104fef602222c43878c21ad0ff5>.

17. See The Federal Power Act of 1935, 16 U.S.C. § 791a (1994).

18. See id.

19. 16 U.S.C. § 824a-3 (1994).


21. See Jon R. Mostel, Overview of Electric Industry Bypass Issues, 37 NAT. RESOURCES

J. 141, 149 (1997).

22. See id.

23. Pub. L. No. 102-486, 106 Stat. 2776 (1992) (codified in scattered titles of U.S.C., 16

U.S.C. § 824k (1994)).

I. THE MOVE FROM MONOPOLY TO COMPETITION

The electric industry is changing from a highly regulated monopoly structureto a combination of monopoly and competitive market. Traditionally, all threefunctions of the industry—generation, transmission, and distribution—werethought to be natural monopolies. However, slowly and consistently14

competition has entered the electric industry. The current consensus is that thegeneration or supply of electricity can be competitive, while the transmission anddistribution functions must remain monopolies. William Massey, the15

Commissioner of the Federal Energy Regulatory Commission (the “FERC”),declared in a recent speech that the only way for the electric industry to proceedis to aggressively move forward toward a competitive but fair electricitygeneration market.16

Competition in electricity generation began in the wholesale energy marketswhich, because of its interstate commerce implications, is governed by federallaws enforced by the FERC. The retail sale of electricity, which has remained17

highly monopolistic until recently, is regulated by individual state laws enforcedby a public utility commission.18

Competition was inadvertently inserted into the wholesale electric generationmarket with the passage of Title II of the Public Utility Regulatory Policy Act of1978 (“PURPA”). Congress passed PURPA in the midst of a national energy19

crisis; its intent was to promote efficient energy generation and the conservationof resources. The law required electric utilities to buy wholesale power20

produced from new production methods—cogeneration and renewableenergy—from certain qualifying facilities (“QFs”). The electric utilities must21

also allow the QFs to use the electric utilities own transmission lines. 22

Competition in the wholesale electric market was further increased throughthe passage of the Energy Policy Act of 1992 (“EPAct”). The EPAct gave the23

Federal Energy Regulatory Commission (the “FERC”) more power to order


24. See 16 U.S.C. § 824k (1994).


26. See id.

27. See id.

28. See id. at 12.

29. 273 U.S. 83 (1927).

30. See id. at 84.

wholesale electric wheeling. The FERC took this new authority and issued24

Orders 888 and 889, which required electric public utilities to set wholesale openaccess transmission tariffs and established an electronic information sharingsystem to encourage the competitive sale of wholesale electricity, respectively.25

Electric utilities have met the challenge, and a vibrant wholesale power markethas developed.

With the success of wholesale electric generation and supply competition,states began to consider inserting competition into the retail sale of electricity.26

The hope is that electricity prices will decrease due to competitive innovationsand efficiencies. Yet, with these state-by-state initiatives come severalconstitutional questions, some of which are discussed below.

II. FEDERAL PREEMPTION OF RETAIL WHEELING

States that desire retail electric competition have mandated the retailwheeling of electricity to allow alternative electricity suppliers access to retailcustomers in areas where the supplier does not own any transmission ordistribution lines. A local utility must provide access to its transmission and27

distribution system to other electric suppliers so that a retail electric customerwill have a choice of suppliers. However, if the alternative electric supplier is28

from out-of-state, then interstate commerce is implicated, and the issue of federalpreemption must be addressed.

The question then is whether the area of retail wheeling has been preemptedby the federal government, or whether states retain the authority to compel retailwheeling. Because no federal statute expressly prohibits states from orderingretail wheeling, this Note examines whether implied federal preemption existsin the area of retail wheeling.

A. Federal/State Jurisdiction in the Electric Industry

Initially, all electricity regulation was done by the states. However, thewatershed case of Public Utilities Commission v. Attleboro Steam & ElectricCo. severely limited a state utility commission’s power over electricity that29

flowed interstate. In Attleboro, Narragansett Company, a Rhode Island electricutility, had a twenty-year full-requirements contract to sell electricity toAttleboro Company, a Massachusetts electric utility. Seven years into the30

contract, Narragansett Company filed a petition with the Public UtilitiesCommission of Rhode Island to increase the electric rates that it chargedAttleboro Company. After a hearing, the rate increase was approved as in the


31. See id. at 86.

32. See id. at 90.

33. See id.

34. 16 U.S.C. § 791a (1994).

35. In 1950 the Federal Power Commission was terminated and its functions were

transferred to the FERC. Reorg. Plan No. 9 of 1950, 16 U.S.C. § 792, set out as noted under this

section (1950). For clarity sake, all references in this Note will be to the FERC.

36. 16 U.S.C. § 824(a).

37. See Peter C. Lesch et al., Preemption, 5 ENERGY L. & TRANSACTIONS (MB) § 144.02[1]

(1998).

38. See 16 U.S.C. § 824(a).

39. 376 U.S. 205 (1964).

40. See id. at 210.

41. See id. at 208.

42. See Federal Power Comm’n v. Florida Power & Light Co., 404 U.S. 453 (1972).

public interest of the people of Rhode Island. However, on appeal the Court31

held that the sale of electricity across state lines was a direct burden on interstatecommerce, and thus the Public Utilities Commission of Rhode Island could notimpose the rate increase.32

Thus, the Attleboro gap was created. States could only regulate the electricrates of intrastate sales, not those sales that occurred in interstate commerce andwere national in character. With the growth of technology, the sale of33

electricity in interstate commerce increased, with no regulatory supervision.Congress stepped in to fill the regulatory gap with the Federal Power Act of

1935 (“FPA”). The FPA created the Federal Power Commission (now the34

“FERC”) to regulate “the transmission of electric energy in interstate commerce35

and the sale of such energy at wholesale in interstate commerce. . . .” The FPA36

was enacted to codify the bright-line test set out in Attleboro; the federalgovernment would regulate interstate wholesale sales of electricity, while theindividual states would continue to regulate the retail sale of electricity.37

Specifically, the FPA limited federal regulation to areas that were not subject tostate regulation.38

However, over the years, the federal regulation of electricity (through theFERC) primarily has increased by expanding the meaning of interstatetransmission of electricity. In Federal Power Commission v. Southern CaliforniaEdison Co. the Supreme Court found that a sale of electricity from one utility39

in California to another utility in California was a sale in interstate commerce forresale, and as such the sale was under federal jurisdiction. The electricity sold40

included some electricity that was generated out-of-state; thus, even though thesale took place entirely within California, interstate commerce was involved, andthe FERC had jurisdiction.41

Later, the Court upheld federal jurisdiction when a Florida utility was onlyindirectly connected to an out-of-state utility’s power lines through the powerlines of another Florida utility. The Court found that once power enters a42

transmission grid that is interconnected to facilities outside of the state, the


43. See id. at 461.

44. See id. at 471 (Douglas, J., dissenting).

45. 461 U.S. 375 (1983).

46. See id. at 380-81.

47. See id. at 381-82.

48. See id. at 383-84.

49. See id. at 384.

50. Id.

51. 40 Fed. Energy Reg. Comm’n Rep. (CCH) ¶61,045, ¶61,121 (1987).

52. See id.

power is transmitted in interstate commerce. 43

Today, virtually all electric utilities are connected to out-of-state power linesin an interconnected grid. So, most of the power that is generated in the UnitedStates crosses state borders at one time or another. Thus, unless the utility can44

prove that no out-of-state power was commingled with the power sold atwholesale, then the FERC has jurisdiction over the sale.

However, the bright-line distinction between wholesale and retail sales—theFERC controlling wholesale sales and state commissions’ controlling retailsales—did not endure unscathed. In Arkansas Electric Cooperative Corp. v.Arkansas Public Service Commission, the Supreme Court allowed the Arkansas45

Public Service Commission to regulate the wholesale electric rates that theArkansas Electric Cooperative Corporation (“AECC”) charged to its membercooperatives. AECC was a member-owned cooperative, funded by the federalRural Electrification Administration (“REA”), which generated and soldelectricity to distributor cooperatives, which, in turn, sold it at retail to ultimatecustomers. However, the FERC held that it did not have jurisdiction over such46

cooperatives under the supervision of the REA. The question remained,47

whether a state commission could then regulate the electric cooperative’swholesale rates or whether the state was preempted by the Federal Power Act orthe Rural Electrification Act. 48

The Court concluded that nothing in the Federal Power Act indicated thatthis was an area best left unregulated. “Congress’s purpose in 1935 was to fill49

a regulatory gap, not to perpetuate one.” Thus, because neither the FERC nor50

the REA regulated the electric cooperative’s rates, the state could do so, eventhough the sale of electricity was at wholesale.

B. Current Jurisdiction over Retail Wheeling

There is considerable disagreement about whether the states have jurisdictionover retail wheeling initiatives. An examination of the FERC decisions, federalelectric legislation, and court decisions illuminate the matter. In Florida Power& Light Co., the FERC determined that it, and not the state commission, had51

jurisdiction over the terms, conditions, and rates for wheeling power producedby cogenerators or small power producers even when the sender and receiver ofpower were located within the same state. 52


53. 16 U.S.C. § 824k (1994).

54. Id.

55. See id.

56. Order No. 888, Promoting Wholesale Competition Through Open Access Non-

Discriminatory Transmission Services by Public Utilities; Recovery of Stranded Costs by Public

Utilities and Transmitting Utilities, FERC Stats. & Regs. (CCH) ¶31,036 at 31,770, 61 Fed. Reg.

21,540 (1996) (codified at 18 C.F.R. §§ 35, 385 (1999)) [hereinafter Order 888].

57. See id. Unbundled transmission service means transmission service that is separated

from the supply of electricity and the distribution of electricity. Thus, the transmission charge only

includes charges for the transmission function, not the electric generation or distribution functions.

58. See id. at 31,770-71.

59. See id. at 31,772.

60. See id. at 31,775.

61. See id. at 31,780-81.

With this expansive reading of what “transmission of electricity in interstatecommerce” meant, it would seem that the FERC would have control over alltransmission within or without a particular state, and thus, over retail wheeling.However, in 1992, Congress limited the FERC’s jurisdiction over retail wheelingwith the passage of the Energy Policy Act (“EPAct”). Section 212(h) of the53

FPA as amended by the EPAct provides:

Prohibition on mandatory retail wheeling and sham wholesaletransactions.No order issued under this chapter shall be conditioned upon or requirethe transmission of electric energy: (1) directly to an ultimate customer,or (2) to, or for the benefit of, an entity if such electric energy would besold by such entity directly to an ultimate customer. . . . Nothing in thissubsection shall affect any authority of any State or local governmentunder State law concerning the transmission of electric energy directlyto an ultimate consumer.54

Thus, only under certain limited circumstances, not relevant here, can the FERCorder direct retail wheeling. The EPAct contains no comparable provision for thestates and, in fact, adds a provision protecting the authority of the states over thetransmission of electric energy to ultimate customers. 55

The FERC’s Order 888, which set the stage for electric wholesalecompetition, addressed the FERC’s wheeling authority. The FERC claimed56

authority over the rates, terms, and conditions of unbundled transmission servicein interstate commerce. However, pursuant to the FPA the states retained57

authority over local distribution service. Some utilities argued that the states58

have jurisdiction over all aspects of retail sales, including unbundled retailtransmission service. Some states argued that the FERC and state commissions59

had concurrent jurisdiction over unbundled transmission service. However, the60

FERC asserted jurisdiction over the transmission component of retail wheelingtransactions while recognizing that it had no authority to order retail wheelingunder the EPAct. Yet, the FERC did not address whether states had the61


62. Id. at 31,781.

63. See Promoting Wholesale Competition Through Open Access Non-Discriminatory

Transmission Services by Public Utilities and Recovery of Stranded Costs by Public Utilities and

Transmitting Utilities, Order No. 888-A (Rehearing), 78 Fed. Energy Reg. Comm’n Rep. (CCH)

¶61,220, 1997 FERC LEXIS 463, *16 (Mar. 4, 1997).

64. Id. at *17 (emphasis added).

65. See id.

66. 16 U.S.C. § 824k (1994). The FERC’s authority under Order 888 has been challenged

in other ways. In Northern States Power Co. v. FERC, 176 F.3d 1090 (8th Cir. 1999), the court

found that the FERC could not require a utility to curtail its retail bundled load on a

nondiscriminatory basis with its wholesale load because the FERC did not have jurisdiction over

bundled retail electric sales. Also, an omnibus appeal of the FERC’s Order 888 is pending. See

id. at 1096.

67. Order 888, supra note 56, at 31,783; see also Barbara S. Jost, Leveling the Playing

Field—Can Retail Reciprocity Work?, 11 NAT. RESOURCES & ENV’T 55, 57 (Spring 1997).

authority to order retail wheeling but stated that, “if unbundled retailtransmission in interstate commerce by a public utility occurs voluntarily or asa result of a state retail access program, [the FERC] has exclusive jurisdiction.. . .” 62

Furthermore, in Order 888's rehearing, the FERC clarified that it could orderindirect unbundled retail transmission service while recognizing that it could notorder retail wheeling directly to an ultimate customer or sham wholesaletransactions. Yet, the FERC implied that states may order retail wheeling,63

noting that when the FERC was prohibited by section 212(h) of the EPAct fromordering retail wheeling, then “entities are eligible for such service under thetariff only if it is provided pursuant to a state requirement or is providedvoluntarily.” Furthermore, the FERC stated that retail customers taking64

unbundled transmission service under a state requirement are only eligible fortransmission service from those providers that the state orders to provideservice.65

Thus, despite the FERC’s assertion of jurisdiction over unbundled retailtransmission service, even it recognized the limits to its authority, namely section212 (h) of the EPAct, and implied that states may be able to order direct retailwheeling. The FERC recognized that states retain jurisdiction over local66

distribution to ultimate customers under the FPA and even stated that when nolocal distribution facilities are identified, states still retain jurisdiction over “theservice of delivering electric energy to end users.”67

C. Analysis of Federal Preemption of Retail Wheeling

A federal law or regulation may preempt state laws by implication in threeways: (1) The federal government could have preempted the entire field ofregulation, leaving no room for state regulation; (2) there may be a conflictbetween federal and state law, where compliance with both is impossible; or (3)


68. See CHEMERINSKY, supra note 12, at 286.

69. See id. at 285.

70. See 16 U.S.C. § 824 (1994).

71. See supra notes 39-44, 51-52 and accompanying text.

72. See 16 U.S.C. § 824 (b) (1).

73. See id. § 824k (h).

74. See id.

75. See id.

76. See Kyle Chadwick, Crossed Wires: Federal Preemption of States’ Authority over

Retail Wheeling of Electricity, 48 ADMIN. L. REV. 191, 195 (1996).

77. Id.

78. By limiting the FERC’s jurisdiction, Congress ensured room for the states to take an

active part in retail wheeling.

79. See Detroit Edison Co. v. Michigan Public Serv. Comm’n, 575 N.W.2d 808 (Mich. Ct.

App. 1998), rev’d on other grounds, 596 N.W.2d 126 (Mich. 1999); Energy Assoc. v. Public Serv.

the state law may impede the achievement of a federal objective. In any case,68

federal preemption is a matter of congressional intent, which can be found in thelanguage, structure, and purpose of federal legislation or regulations. 69

The jurisdictional dispute over electricity is clear. The FPA gave the federalgovernment jurisdiction over electric transmission in interstate commerce and thesale of energy at wholesale in interstate commerce. Interstate commerce has70

been expanded to include virtually all transmission of electricity. Yet, the71

states retain jurisdiction over generation, local distribution, and transmission ofelectric energy in intrastate commerce. The FERC is prohibited from ordering72

retail wheeling to a direct customer, while the states are not expressly prohibitedfrom or expressly authorized to do so. In addition, the EPAct provides that73

states retain the authority over transmission of electric energy directly to anultimate customer.74

Many, particularly the states, argue that retail wheeling is an area of stateconcern because the FERC is banned from ordering it and states are not.However, there could be a federal legislative decision that retail wheeling shouldnot be ordered at all, by anyone. That argument is relatively weak consideringthe addition of the saving clause in the EPAct, which leaves intact state authorityover transmission to ultimate customers. Yet, the saving clause could be read75

to preserve for states only the jurisdiction they had over transmission before the1992 EPAct revisions. This would not include jurisdiction over retail wheeling.76

While it is true that Congress did not declare that “States shall have authorityover all transmission to ultimate consumers,” it is also true that Congress did77

not say “States are prohibited from ordering retail wheeling transactions.” Eitherstatement could have easily been made. Neither statement being made byCongress may imply a legislative decision to allow FERC and the states to worktogether to determine the best result.78

The only court or utility commission decisions on the federalpreemption matter have determined that states are not preempted from orderingretail wheeling. In Detroit Edison Co. v. Michigan Public Service79


Comm’n, 653 N.Y.S.2d 502 (N.Y. Sup. Ct. 1996); DPUC Investigation into Retail Electric

Transmission Service, Docket No. 93-09-29, 1994 Conn. PUC LEXIS 1(Connecticut Department

of Public Utility Control 1994).

80. Detroit Edison Co., 575 N.W.2d at 813 (stating that the Michigan utility commission

does not have the statutory authority to order retail wheeling. The Court did not decide the issue

of whether the state was preempted by the federal government by ordering retail wheeling.).

81. See id. at 814.

82. 80 Fed. Energy Reg. Comm’n Rep. (CCH) ¶61,121 (1997).

83. See id.

84. 653 N.Y.S.2d 502 (1996).

85. See id. at 511. The court relies on the saving clause contained in section 212 (h) and on

section 212 (g) which provides: “No order may be issued under this chapter which is inconsistent

with any State law which governs the retail marketing areas of electric utilities.” 16 U.S.C. § 824k

(g) (1994).

86. No. 93-09-29, 1994 WL 454686, at *1 (Conn. D.P.U.C.).

87. Id. at *11.

88. See id. at *9.

Commission, the state’s retail wheeling pilot program was not preempted. The80

court found that the EPAct saving clause, along with evidence that the FERCitself was willing to cooperate with states that implemented retail wheelingexperiments, proved that states retained the authority to order retail wheeling.81

Further evidence that states can order retail wheeling is found in ConsumersEnergy Co. The FERC dismissed an application for a direct retail tariff because82

the facilities involved were in local distribution, an area over which the FERChad no jurisdiction. Thus, states should be free to implement retail wheeling83

programs due to states’ jurisdiction over local distribution.Also, in Energy Ass’n of New York v. Public Service Commission of New

York, the court found that the New York Public Service Commission was not84

preempted by federal law from effectuating retail wheeling. Again the courtrelied on the savings clauses contained in the EPAct.85

The Connecticut Department of Public Utility Control (“DPUC”) also agreedthat it was not preempted by federal law from ordering retail wheeling. In DPUCInvestigation into Retail Electric Transmission Service, the DPUC argued that86

even though some of the electricity used by an in-state utility came from out-of-state, that is “true of most retail utilities, and the national fabric does not seemto have been seriously disturbed by leaving regulation of retail utility rateslargely to the States.” The DPUC claimed that legislative intent was to give87

states authority over the sale of electricity to an ultimate customer, and thus, thestates have authority over retail wheeling to such ultimate customers.88

Based on these decisions, the states believe that they have the authority toorder retail wheeling and have done so. The FERC seems to accept this to acertain extent, though the FERC is quick to assure its authority over transmissionin interstate commerce, be it retail or wholesale. While the federal governmentthrough the FERC is heavily involved in the electric regulation field, the FPA asamended by PURPA and the EPAct, explicitly leaves areas of regulation for the


89. This, in fact, is the road states are taking. See, e.g., In re Commission's Own Motion to

Consider the Restructuring of the Electric Utility Industry, 182 Pub. Util. Rep.4th (PUR4th) 416

(Mich. Pub. Serv. Comm'n 1998) (finding FERC’s approved transmission tariff should be used in

retail electricity direct access plan).

90. Perhaps the best way to describe the cooperation would be subsequent jurisdiction, as

opposed to concurrent jurisdiction. First states order retail wheeling, and then the transmission

rates, terms, and conditions are determined in cooperation with the FERC.

91. See supra notes 5-8. Even though the Michigan Supreme Court has found that the

Michigan Public Service Commission does not have the statutory authority to order retail wheeling,

Consumers Energy and Detroit Edison, which together control 90% of Michigan’s electricity, have

stated that they will voluntarily comply with the commission’s plan. See Michigan Utilities

Volunteer to Deregulate, THE ENERGY DAILY, July 6, 1999, at 3.

92. 220 ILL. COMP. STAT. 5/16-101 (West 1997).

93. See 220 ILL. COMP. STAT. 5/17-200, 5/17-300 (West 1997).

94. See id.

states alone. Thus, states clearly are not preempted by field preemption. Also,there is no federal objective that is harmed by states ordering retail wheeling,precluding federal objective preemption. In fact, retail wheeling encourageselectricity competition, an avowed purpose of the EPAct.

Thus, the only way a state may be preempted by federal law in the retailwheeling area is through conflict preemption. As long as a state is willing tocooperate with the FERC on such areas as transmission rates, terms, andconditions, then a state would not be preempted. However, if the state and the89

FERC disagree on a transmission tariff, then it appears that the FERC wouldtrump due to its jurisdiction over the interstate transmission of electricity. Thebest route is for states and the FERC to work together with states ordering retailwheeling and controlling the sale to the ultimate customer, and the FERCcontrolling the transmission rates.90

III. DORMANT COMMERCE CLAUSE AND RETAIL WHEELING RECIPROCITY

Some states face an additional constitutional challenge to their electric retailcompetition plans. To date, four states (Illinois, Michigan, Montana, andOklahoma) have retail open access plans that require reciprocal access to out-of-state electric utilities’ service territories. The reciprocity requirements of each91

state are similar, so for brevity sake only the Illinois plan will be considered. The Illinois Electric Service Customer Choice and Rate Relief Law of 1997

(the “Act”) calls for a phase-in of retail competition until 2002 when most retail92

customers will have a choice of electric supplier. The Act provides for twoforms of reciprocity—one for in-state municipal and rural cooperative electricsuppliers and one for out-of-state alternative retail electric suppliers (“ARES”).Rural cooperatives and municipal utilities are not covered by the Act unless theyelect to be. If one so elects, then the utility must provide open access to its93

service territory if it desires to serve customers in another utility’s territory. 94

ARES, on the other hand, are covered by the Act. If an ARES, its affiliate,


95. See id. 5/16-115. The Act provides:

[I]f the applicant, its corporate affiliates or the applicant’s principal source of electricity

(to the extent such source is known at the time of the application) owns or controls

facilities, for public use, for the transmission or distribution of electricity to end-users

within a defined geographic area to which electric power and energy can be physically

and economically delivered by the electric utility or utilities in whose service area or

areas the proposed service will be offered, the applicant, its corporate affiliates or

principal source of electricity, as the case may be, provides delivery services to the

electric utility or utilities in whose service area or areas the proposed service will be

offered that are reasonably comparable to those offered by the electric utility. . . .

Id.


97. U.S. CONST. art. I, § 8, cl. 3.


99. See id.

100. See id.

101. See id.

102. See id. at 329.

or its principal source of electricity owns or controls facilities for the distributionand transmission of electricity in its own defined service territory, then thatARES must provide reasonably comparable delivery service to the electric utilityin whose service area the proposed service will be provided by the ARES.95

This reciprocity provision may be seen as an impermissible burden oninterstate commerce. While there is no express constitutional provision thatprohibits states from burdening interstate commerce, courts have inferred thispower from the Commerce Clause. The Commerce Clause states Congress96

shall have the power “to regulate Commerce with foreign Nations, and among theseveral States. . . .” The dormant or negative Commerce Clause prevents states97

from erecting trade barriers or discriminating against out-of-staters even in theabsence of federal regulation.98

Dormant Commerce Clause challenges generally fall into twocategories—laws that discriminate against out-of-staters and laws that treat out-of-staters and in-staters alike. The former law is subject to a much stricter test,99

whereas the latter law is given more deference and will only be foundunconstitutional if the burden on interstate commerce outweighs the law’sbenefits.100

A. Reciprocity Laws Under the Strict Scrutiny DormantCommerce Clause Test

If a state law is found to discriminate on its face or in its effect on out-of-staters, there is a presumption that the law violates the dormant CommerceClause. However, such laws are not per se unconstitutional. If the state can101

prove that the law is necessary and is the least restrictive way to achieve animportant governmental purpose, then the law may stand.102


103. See Northeast Bancorp, Inc. v. Board of Governors of Fed. Reserve Sys., 472 U.S. 159

(1985) (finding state reciprocal banking privileges law not violative of the Commerce Clause

because Congress authorized such laws).

104. See New Energy Co. v. Limbach, 486 U.S. 269, 275 (1988).

105. 458 U.S. 941 (1982).

106. See id. at 958.

107. See id. at 956.

108. See id. at 957-58.

109. 424 U.S. 366 (1976).

110. See id. at 367.

111. See id. at 375-76.

112. See id. at 377.

113. See id. at 378.

114. Id. at 379.

When the Supreme Court has dealt with reciprocity laws, in all but oneinstance, it has found them unconstitutional. Even though reciprocity laws do103

not completely ban out-of-staters from entry into the market, this fact does notsave reciprocal laws that discriminate against out-of-staters. 104

In Sporhase v. Nebraska, a Nebraska statue prohibited the removal of105

ground water for use in another state unless the other state granted reciprocalrights to withdraw and transport its ground water for use in Nebraska. Findingthat the law discriminated against out-of-staters, the Court applied the strictscrutiny standard and found the law unconstitutional. The Court emphasized106

that a legitimate local purpose would be conservation and preservation, a healthand safety regulation at the core of a state’s police power, but not economicprotectionism. While Nebraska did have a legitimate local interest in the107

conservation of water, the reciprocal law used was not closely tailored to thatpurpose; therefore, the Court held that law was an unconstitutional burden oninterstate commerce.108

Similarly, in Great Atlantic & Pacific Tea Co. v. Cottrell, the Court found109

that a Mississippi regulation impermissibly burdened interstate commerce. Theregulation stated that milk from another state could be sold in Mississippi if theother state’s regulatory agency accepted Grade A milk produced in Mississippion a reciprocal basis. The regulation required a signed reciprocity agreement110

with each state. The Court concluded that the means used to protect the healthof its citizens was not rationally related to that purpose. Furthermore, there111

were less restrictive means to achieve the state purpose, such as inspecting milkbrought in from other states.112

Mississippi also argued that the provision was a free trade provision,encouraging rather than discouraging trade in milk products. The Court113

concluded that Mississippi cannot “use the threat of economic isolation as aweapon to force sister States to enter into even a desirable reciprocityagreement.” Furthermore, Mississippi could sue Louisiana, or any other state,114

if it believed that Louisiana law limiting the importation of milk violated the


115. See id.

116. 486 U.S. 269 (1988).

117. See id. at 279.

118. See id. at 275.

119. See id. at 274.

120. See id. at 279.

121. See 220 ILL. COMP. STAT. 5/16-116 (West 1997).

122. See id. 5/16-115.

123. See id. 5/17-200, 5/17-300.

Commerce Clause.115

Thus, even if the avowed purpose of a reciprocity requirement is toencourage trade, the Court will invalidate it, unless there is an importantgovernmental purpose that cannot be achieved through nondiscriminatory means.

In New Energy Co. v. Limbach, Ohio offered a tax credit for in-state116

producers of ethanol and for out-of-state producers only if that state provided forsimilar tax treatment of Ohio-produced ethanol. The Court found the tax creditviolated the dormant Commerce Clause because the only true state purpose wasmerely economic protectionism for in-state ethanol producers. The reciprocity117

clause did not save the discriminatory provision. The substantial commercialdisadvantage placed upon out-of-state ethanol producers was just asdiscriminatory as if Ohio had completely excluded the out-of-state goods.118

Even though the reciprocity clause may promote trade in ethanol by encouragingother states to give ethanol tax credits, the tax credit was still faciallydiscriminatory and thus, unconstitutional. Furthermore, the means used were119

not the least restrictive to promote the ends of reducing harmful exhaustemissions or increasing trade in ethanol.120

The Illinois retail electric reciprocity provision is not necessarily faciallydiscriminatory against out-of-staters. All electric utilities in the state must alsoopen their service territories to other electric utilities in-state and providedelivery service for such utilities. So too, ARES must provide reciprocal121

access to their territories in order to serve retail customers in Illinois. Yet, in-122

state municipal and rural cooperatives do not need to allow access to theirterritory, unless they elect to serve customers in another Illinois utility’sterritory. Thus, out-of-state electric providers are treated the same as in-state123

electric cooperatives and municipal utilities if either wants to serve customersoutside its territory, it must provide reciprocal access to its territory.

However, electric utilities in Illinois are treated somewhat differently. Theyare required to open their territory to other electric suppliers and are required toprovide delivery service for the electricity supplied by those other suppliers.Thus, an Illinois electric utility is assured access to other Illinois territories,whereas an out-of-state utility must first provide access to its own territory.

Regardless of whether the Illinois Act discriminates against out-of-staters onits face, it almost certainly does discriminate in its effect. If the impact of a lawis discriminatory, this is often enough to bring the case under the strict scrutiny



125. 511 U.S. 383 (1994).

126. See id.

127. 437 U.S. 117 (1978).

128. See id. at 137.

129. See id. at 125.

130. See id. at 126.

131. Id. at 121.

dormant Commerce Clause test. In C & A Carbone, Inc. v. Town of124

Clarkstown, a facially neutral law requiring all hazardous waste to be125

deposited at a transfer station was found to discriminate against out-of-staters inits impact. Under the strict scrutiny test, the Court found that even though thelaw applied to in-staters as well as out-of-staters, the effect on out-of-staters wasenough to deem the law discriminatory. 126

However, in Exxon Corp. v. Governor of Maryland, a state law was found127

not to be discriminatory even though it had a severely disproportionate effect onout-of-staters. A producer of petroleum was prohibited from operating a retailstation in Maryland. Because almost all petroleum products used in Maryland128

were produced out-of-state, local businesses were advantaged, while out-of-statecompanies were disadvantaged. Even though the burden of the statute fell solelyon out-of-state companies, this did not lead to the conclusion that Maryland wasdiscriminating against interstate commerce. Because the statute did not129

impede the flow of petroleum in interstate commerce, did not place added costsupon interstate dealers, or distinguish between in-state and out-of-statecompanies, the majority found no discrimination. While the majority did not130

rely on it in its holding, it is noteworthy that the purpose of the Maryland statutewas to “correct the inequities in the distribution and pricing of gasoline” reflectedby a survey the State had done. It is possible that the noble purpose of131

eliminating discrimination may have influenced the Court in its holding thatdiscrimination in effect alone was not enough to bring the statute under the strictscrutiny test.

While the Illinois reciprocity provision affects utilities in-state as well as out-of-state, it clearly affects out-of-state utilities disproportionately. All in-stateutilities are required or have a choice of free competition in the retail electricmarket. However, depending on the other state’s laws, almost all out-of-stateutilities do not have a choice. A utility simply is not free to open its territory tonew electric suppliers, unless retail electric competition has begun. This, alongwith the arguably protectionist nature of the statute, would most likely make theIllinois reciprocity provision a discriminatory one, subject to the strict scrutinytest.

Therefore, only if the reciprocity requirement achieves an important statepurpose that cannot be achieved with nondiscriminatory or less burdensomemeans will it be found constitutional. The purpose of the Illinois Act is to openup the retail electric market to competition. Surely, this is a legitimate and even


132. This is evidenced by the fact that every state and the U.S. Congress has considered retail

competition plans. See State Profiles, supra note 2.

133. See infra notes 197-217 and accompanying text for a more detailed explanation of the

state interest in the reciprocity provision.

134. SeeYAJIMA, supra note 9, at 1.

135. See Indianapolis Power & Light Co. v. Pennsylvania Pub. Util. Comm’n, 711 A.2d 1071

(Pa. Commw. Ct. 1998) (recognizing the state’s interest in maintaining the transmission and

distribution networks located within the state).


137. See Arkansas Elec. Coop. v. Arkansas Pub. Serv. Comm’n, 461 U.S. 375, 377 (1983)

(noting that the regulation of electric utilities is one of the most important functions associated with

the police powers of the states).

138. See id.

important state interest.132

However, when the reciprocity requirement is considered separately, the statepurpose needs more examination. There must be a state interest beyond simpleeconomic protectionism that is important enough to justify the discriminationevident in the reciprocity clause. Reciprocity is designed to ensure fair play inthe newly opened market. Its purpose is not entirely to protect local businessinterests. The health, welfare, and safety of the state’s citizens could beadversely affected if retail competition were to occur without a reciprocityrequirement. 133

Out-of-state utilities could come into Illinois markets and “cherry pick” allthe incumbent utility’s major commercial and industrial customers. Because thatutility’s state does not have an open market, this would leave the Illinois utilityno way to recover this lost revenue. The reduction in revenue would increaserates for the essentially captive residential customers who may remain captivebecause it would not be economical for other utilities to come in and serve theresidential loads. Even if the residential customers were picked up by anotherelectric supplier, they would still be dependent on the incumbent utility fortransmission and distribution service. Conceivably, the local incumbent utility134

could be forced into bankruptcy or not have enough revenue to adequatelymaintain the transmission and distribution lines in its territory, potentiallydisrupting the flow of electricity to customers in the state. Even after retail135

competition in electric supply arrives, the delivery function of electricity willremain a monopoly highly regulated by the state. Therefore, the state will136

continue to have a strong interest in the provision of electricity to its citizens.Obviously, electricity is necessary for the health, safety, and welfare of thestates’ citizens.137

Yet, even if a court found the above situation plausible and found animportant state purpose in the reciprocity requirement, the purpose must not beachievable through an alternative nondiscriminatory or less restrictive way. Thereciprocity provision may not withstand this strictest of scrutiny. Traditionally,the states are given great latitude in the manner of their regulation in the retailelectric industry. A state could regulate the industry during the transition from138


139. See also Jusitn M. Nesbit, Note, Commerce Clause Implications of Massachusetts’

Attempt to Limit Importation of “Dirty” Power in the Looming Competitive Retail Market for

Electric Generation, 38 B.C. L. REV. 811, 842-843 (1997) (finding that the State’s attempted

legislation limiting the importation of dirty power would violate the dormant Commerce Clause

because less restrictive means existed to attain the State’s environmental purposes).


141. See id.

142. 426 U.S. 794 (1976).

143. Id. at 810.

144. 467 U.S. 82 (1984).

145. See id. at 97.

146. See id. at 99.

monopoly to competition in various, less restrictive, ways. A state could requirelicensing and other limitations on out-of-state utilities, just as it does for in-stateutilities, without completely banning out-of state utilities which do not providereciprocal access. Thus, even if there is a legitimate and important state interestin reciprocity, the Act’s reciprocity requirement is not the least burdensomemeans of achieving the state’s health, safety, and welfare goals.139

B. Exceptions to the Dormant Commerce Clause: Market Participant

Even if a state law would violate the dormant Commerce Clause, the courtshave fashioned two situations where the law may still be upheld—where the stateis a market participant and where Congress has authorized the activity. When140

the state is not acting as a regulator, but rather as a participant in an economicmarket, then the state may favor its own citizens.141

This doctrine was first recognized in Hughes v. Alexandria Scrap Corp.142

In this case, Maryland established a program to reduce the number of junkedcars in the state, imposing more stringent standards on out-of-state scrapprocessors than on in-state processors. The Court finding no dormant CommerceClause violation, stated “[n]othing in the purposes animating the CommerceClause prohibits a State, in the absence of congressional action, fromparticipating in the market and exercising the right to favor its own citizens overothers.”143

However, the state is only exempted from the dormant Commerce Clausestrictures while acting as a participant in a particular market. In South-CentralTimber Development Inc. v. Wunnicke, the dormant Commerce Clause was144

violated when a state law required logs taken from state lands to be processedwithin the state. Although, the state could sell to whomever it desired as amarket participant, it could not attach conditions to the sale that discriminatedagainst out-of-staters. The state could discriminate only in the market in which145

it participated. In Wunnicke, the state attempted to dictate what a purchaser didwith the logs after the state sold the logs to the purchaser. Thus, the marketparticipant exception did not save the law from unconstitutionality. 146


147. 155 F.3d 59 (2d Cir. 1998).

148. See id. at 62.

149. See id. at 79.

150. See, e.g., South-Central Timber Dev., Inc., 467 U.S. at 93 (noting the market participant

doctrine had only been applied in three cases to date.)

151. See Yeager’s Fuel, Inc. v. Pennsylvania Power & Light Co., 22 F.3d 1260 (3d Cir. 1994)

(holding an electric utility to be state actor for antitrust purposes). But see Cantor v. Detroit Edison

Co., 428 U.S. 579 (1976) (finding electric utility was not state actor for antitrust purposes).

152. 455 U.S. 331 (1982).

153. See id.

In Automated Salvage Transport v. Wheelabrator Environmental Systems,147

the state owned several trash-to-energy processing plants. The state allowed aprivate trash-to-energy plant to open pursuant to a settlement agreement that theprivate plant would turn away certain municipal waste that was alreadycontracted to go to the state plants. The state was found to be a market148

participant trying to enforce its contracts with the municipalities; therefore, thesettlement did not violate the dormant Commerce Clause.149

The states with electric retail reciprocity clauses likely would not beconsidered market participants. The doctrine is very specifically and sparselyapplied. It is true that electric utilities have been found to be state actors for150

antitrust purposes in some instances. However, even though electric utilities151

are highly regulated entities, they do not reach the point where the state isactually participating in the market. In New England Power Co. v. NewHampshire, the Court found that electricity was manufactured by private152

corporations using privately owned facilities. Thus, New Hampshire was not amarket participant when it sought to restrict the sale of hydroelectric power outof the state. The state is truly acting as a regulator, not a market participant,153

when it enacts and carries out laws aimed at the state’s electric utility industryas a whole.

However, if a state did own an electric company, then it is conceivable thatthe state could prohibit out-of-state retail electric suppliers from sellingelectricity to end-users in its own service territory unless the utility allowed thestate-owned electric company to sell retail electricity in its service territory. Inthat case, the state, as a seller of electricity, would truly be operating as a marketparticipant and not merely as a regulator of the retail electric market.

Similarly, a municipal utility could claim market participant status.Municipal utilities (and sometimes rural cooperatively owned utilities) arenormally exempted from pervasive state regulation because these utilities are, inessence, owned by the customers. It is possible that a municipal utility couldimpose a reciprocity requirement of its own and be exempt from a CommerceClause attack as a market participant.

However, that is not the case here because the states are enacting legislationand regulations to regulate the retail electric market. The state is acting asregulator and not a market participant.


154. See, e.g., In re Rahrer, 140 U.S. 545 (1891).


156. See id.

157. 472 U.S. 159 (1985).

158. See id. at 174.

159. See 16 U.S.C. § 824 (1994).

160. 455 U.S. 331 (1982).

161. See id. at 339-40.

162. Id. at 341.

163. Id. (quoting Southern Pac. Co. v. Arizona ex rel. Sullivan, 325 U.S. 761, 769 (1945)).

164. See id.

165. See id.

C. Exceptions to the Dormant Commerce Clause:Congressional Authorization

Another way a state law can be exempted from the dormant CommerceClause is if Congress has authorized the state to act. This is a long acceptedpractice and one of the few times when Congress has authority to overrule a154

Supreme Court decision. If the Court finds that a certain state law violates the155

dormant Commerce Clause, then Congress can pass a law specificallyauthorizing the state law and Congress’ decision will stand.156

For instance, in Northeast Bancorp Inc. v. Board of Governors of the FederalReserve System, the Court upheld Massachusetts and Connecticut laws that157

only allowed out-of-state holding companies to acquire in-state banks if thecompany’s state provided for reciprocal and equivalent banking privileges forMassachusetts or Connecticut companies. The laws would have violated thedormant Commerce Clause except that Congress authorized them in the BankHolding Company Act. 158

There have been claims that the Federal Power Act (“FPA”) has given statescertain immunity from dormant Commerce Clause attack. Recall that when theFPA gave the federal government power over energy regulation it reserved to thestates certain powers. In New England Power Co. v. New Hampshire, a New159 160

Hampshire statute prohibited the exportation of hydroelectric energy when theNew Hampshire Public Utilities Commission deemed the public interest wouldbe served by using the power in-state. New Hampshire claimed that the statutewas protected from the dormant Commerce Clause because Congress hadauthorized the statute in the FPA. Section 201(b) of the FPA provided that161

nothing in the Act should “deprive a State or State commission of its lawfulauthority now exercised over the exportation of hydroelectric energy which istransmitted across a State line.” However, the Court found that this was not162

“an affirmative grant of power to the states to burden interstate commerce ‘in amanner which would otherwise not be permissible.’” The saving clause163

merely saved the then existing state laws from federal preemption. Neither the164

legislative history nor the language of the FPA indicated congressional intent toimmunize states from Commerce Clause challenges. In fact, the Court noted,165


166. See id. at 343.

167. 502 U.S. 437 (1992).

168. See id. at 457. Oklahoma argued that using in-state coal, which was higher in sulfur,

combined with Wyoming coal would reduce local electric rates for consumers and conserve low-

sulfur coal for future use. See id. at 457-58.

169. See id. at 458.

170. See id.

171. See id. (citing Arkansas Elec. Coop. Corp. v. Arkansas Pub. Serv. Comm’n, 461 U.S.

375 (1983); New England Power Co. v. New Hampshire, 455 U.S. 331 (1982)).

172. 77 F.3d 567 (1st Cir. 1996).

173. Id. at 569.

174. See id.

175. See id. at 570.

176. See id.

177. See id.

that even if some legislative history indicated that Congress meant to protectstates from Commerce Clause challenge, unless Congress has expressly statedthat policy and intent, the Court cannot find congressional authorization.166

In Wyoming v. Oklahoma, Oklahoma claimed that the saving clause in the167

FPA gave congressional authorization to an Oklahoma state law that requiredelectric utilities to use at least ten percent Oklahoma coal. Oklahoma believedthat the saving clause that reserved to the states the regulation of retail electricrates permitted Oklahoma to discriminate in favor of its own citizens.168

However, the Court found that even if the law was a legitimate part of the state’sretail rate making authority, it was not exempt from dormant Commerce Clausescrutiny. Relying on New England Power Co. v. New Hampshire, the Court169

noted that Congress must present an unambiguous intent to authorize states toburden interstate commerce and that intent was not found in the FPA.170

Furthermore, the Court stated that its past decisions have uniformly subjectedelectric energy law cases to Commerce Clause scrutiny on the merits.171

Two more cases illuminate, or perhaps cloud, how explicit the congressionalauthorization must be in order to immunize states from Commerce Clausechallenges. In United Egg Producers v. Puerto Rico Department ofAgriculture, a federal egg labeling statute provided “no State or local172

jurisdiction other than those in noncontiguous areas of the United States mayrequire labeling to show the State or other geographical area of production ororigin.” Puerto Rico, being a noncontiguous area of the United States, passed173

a law requiring eggs imported into the Commonwealth to be stamped with thestate of origin. 174

However, the court found that the alleged congressional authorization did notmeet the high standard of explicitness necessary to exempt the law from thedormant Commerce Clause. The court concluded that Congress could have,175

but did not, affirmatively give Puerto Rico authorization to require egglabeling. So, if the language of the statute was read literally, it exempted176

Puerto Rico from this specific egg labeling prohibition. However, it did not177


178. See id. While the egg labeling statute could be read as a congressional authorization for

noncontiguous states to make any egg labeling regulations they so desired, the court found that this

more extreme reading was not necessary because Congress’ intent was not unmistakably clear. See

id. at 571.

179. 146 F.3d 1177 (9th Cir. 1998), cert. denied, 119 S. Ct. 872 (1999).

180. Id. at 1180.

181. Id. at 1181.

182. See Wyoming v. Oklahoma, 502 U.S. 437 (1992); New England Power Co. v. New

Hampshire, 455 U.S. 331 (1982); see also supra notes 159-71 and accompanying text.

183. See 16 U.S.C. § 824k(g) (1994).

184. See id. § 824k(h).

185. Id. § 824k(g) (emphasis added).

mean that any regulation Puerto Rico required would be acceptable. Puerto Ricowas still constrained by the strictures of the dormant Commerce Clause. 178

Yet, in Shamrock Farms Co. v. Veneman, the court found congressional179

authorization for California milk standards. The federal Farm Bill stated that noprovision of the Farm Bill or any other provision of law “shall be construed topreempt, prohibit, or otherwise limit the authority of the State of California,directly or indirectly, to establish or continue to effect any law, regulation, orrequirement regarding . . . milk products. . . .” The court argued that the180

statement “any other provision of law” and “otherwise limit” indicatedcongressional intent to exclude California from the dormant Commerce Clause,not merely from federal laws or regulations. 181

The state retail electric reciprocity laws could claim congressionalauthorization by the FPA and its EPAct amendments. The case for FPAauthorization is relatively weak as the two precedent cases prove. However,182

the EPAct contains additional saving clauses that arguably could becongressional authorization for states in the areas of retail marketing and the183

transmission of electric energy directly to an ultimate consumer. 184

First, the states would need to prove that the reciprocity clauses fall withinthe authority that Congress has reserved for the states in these two saving clauses.While the reciprocity clauses do involve the retail marketing areas andtransmission of energy to an ultimate customer, the saving clauses certainly donot specifically mention state reciprocity clauses. Yet, even assuming reciprocityclauses are covered by these clauses, congressional authorization would not befound.

The saving clauses do not explicitly exempt states from the CommerceClause in these two areas. The first clause states that “[n]o order may be issuedunder this chapter which is inconsistent with any State law which governs theretail marketing areas of electric utilities.” Applying the above precedential185

decisions, the clause merely saves state laws from preemption or interferencefrom the EPAct, not from the strictures of the dormant Commerce Clause.

A second saving clause states that “[n]othing in this subsection shall affectany authority of any State or local government under State law concerning the


186. Id. § 824k(h) (emphasis added).

187. 146 F.3d 1177 (9th Cir. 1998).

188. Id. at 1181 (emphasis added).

189. See supra text accompanying notes 124-39.


191. See Minnesota v. Clover Leaf Creamery Co., 449 U.S. 456 (1981) (holding that a law

prohibiting milk sold in plastic containers that disproportionately benefitted in-state paper

producers was not discriminatory); Exxon Corp. v. Governor of Maryland, 437 U.S. 117 (1978)

(finding state law not to be discriminatory even though the law had a severely disproportionate

effect on out-of-staters).

transmission of electric energy directly to an ultimate consumer.” Thus, the186

federal law is only saving the states’ authority from preemption under thissubsection. It is not exempting all state action in the area from dormantCommerce Clause analysis. As Shamrock Farms Co. v. Veneman, explained,187

Congress does not need to explicitly claim it is shielding the state from thedormant Commerce Clause; however, Congress must at least claim that the statelaw shall not be preempted by the current law or “any other provisions of law.”188

Nothing in the EPAct provisions or the legislative history shows unmistakablyclear congressional intent to exempt states from dormant Commerce Clauseanalysis.

D. Reciprocity Laws Under the Balancing Commerce Clause Test

As explained above, the four states reciprocity laws, as currently written,would most likely fall under the strict scrutiny Commerce Clause test that isreserved for discriminatory state laws. However, it may be possible to write189

a state retail electric restructuring law that does not discriminate and insteadwould be subject to the less strict balancing test. If the state restructuring lawtreated all electric utilities in the state and outside of the state the same, the lawwould not discriminate on its face. Such a law could make all opening up ofdefined service territories optional on the part of the electric utility. However,if a utility choose to serve customers in an area that was not its own, then thatutility would be required to allow the other electric utility to serve customerswithin its own service territory. In other words, all in-state electric utilitieswould be subject to a reciprocity requirement; the same requirement that all out-of-state and municipal and rural cooperatives are subject to under the Illinois Act.Thus, all electric utilities would be treated alike; Illinois electric utilities wouldno longer have the automatic advantage of knowing they could serve in any otherIllinois electric utility’s area.

However, such a law may be subject to claims of discriminatory impact.Case law seems inconsistent about when a discriminatory impact or purposereaches a level that brings a state law under the strict scrutiny Commerce Clausetest. Some state laws that had a discriminatory purpose and effect were not190

considered discriminatory. The proposed reciprocity law does not have a191

discriminatory intent or purpose. Its purpose it to allow electric utilities the


192. The surrounding states may not have open retail electricity markets. Thus, out-of-state

utilities may not have a true choice to join the open state’s retail market, because they could not

provide reciprocal access.

193. 511 U.S. 383.

194. See text accompanying supra notes 127-31 for a more detailed examination of Exxon

Corp., 437 U.S. at 121.

195. 397 U.S. 137 (1970).

196. Id. at 142 (citing Huron Portland Cement Co. v. City of Detroit, 362 U.S. 440, 443

(1960)).

197. Arkansas Elec. Coop. Corp. v. Arkansas Pub. Serv. Comm’n, 461 U.S. 375, 377 (1983).

198. See id. at 379.

199. See id. at 390.

200. See id.

freedom to be competitive, while ensuring fair play. Yet, the impact of the lawmay fall disproportionately on out-of-state utilities. However, that may not be192

enough to make the law discriminatory. Like Exxon Corp., the purpose of the193

electric restructuring laws is to eliminate the discrimination that already existsin the electric industry by opening up service territories to competition. Thus,194

consistent with Exxon Corp., a court could find that the discriminatory impact ofthe reciprocity laws is not enough to bring the law under the strict scrutiny test.Therefore, the traditional balancing test would apply.

The balancing test for dormant Commerce Clause analysis was described inPike v. Bruce Church, Inc.: “Where the statute regulates even-handedly to195

effectuate a legitimate local public interest, and its effects on interstate commerceare only incidental, it will be upheld unless the burden imposed on suchcommerce is clearly excessive in relation to the putative local benefits.” Thus,196

the reciprocity clause only needs to have a legitimate state purpose, not animportant one. And, the burden on interstate commerce does not need to be theleast restrictive burden possible, but only needs to be less than the local benefitsof the law.

Proof of a legitimate state interest in the provision of electric service is nothard to find. It is accepted that “the regulation of utilities is one of the mostimportant of the functions traditionally associated with the police power of theStates.” When determining whether a state electric utility law violates the197

Commerce Clause, the courts had traditionally relied on a bright linedistinction—wholesale sales and transmission in interstate commerce were forthe federal government and retail sales, intrastate transmission, and distributionof electricity were subjects of state authority. However, in Arkansas Electric198

Cooperative Corp. v. Arkansas Public Service Commission, the Court determinedthat the modern Commerce Clause test was a better method. Thus, electric199

utilities are subject to the Pike v. Bruce Church test, just as all other industriesare. Furthermore, the Court noted that the balancing test usually gives morelatitude to the state regulation. 200

Thus, in Arkansas Electric Cooperative Corp. v. Arkansas Public ServiceCommission, the Court allowed Arkansas to regulate a wholesale electric


201. See id. at 381-82; supra text accompanying notes 45-50 for a discussion of the federal

preemption issue in Arkansas Electric Cooperative Corp.

202. See Arkansas Elec. Coop. Corp., 461 U.S. at 394.

203. See id. at 395.

204. 519 U.S. 278 (1997).

205. While General Motors Corp. v. Tracy is a natural gas case, the similarities in the Natural

Gas Act and Federal Power Act are sufficient to assert its relevance. See, e.g., Arkansas Elec.

Coop. Corp., 461 U.S. at 378-79 (noting that Congress created the FERC to oversee the wholesale

transaction of both the electric and the natural gas industries).

206. See General Motors Corp., 519 U.S. at 286-89.

207. See id. at 303-04.

208. See id. at 304-06.

209. 341 U.S. 329 (1951).

210. General Motors Corp., 519 U.S. at 305-06.

211. See id. at 303-04.

transaction that was traditionally the FERC’s role. However, because thewholesale transaction concerned a rural cooperative funded by the RuralElectrification Administration (“REA”), the FERC had disclaimed jurisdiction.201

The state was found to have a legitimate state interest in the wholesale ratescharged by the rural cooperative because its operation occurred within the stateand the wholesale rates affected the retail rates of consumers. Furthermore, the202

effect on interstate commerce was found to be incidental. The Court concludedthat even though some of the electricity came from out-of-state, that was true formost retail utilities and the states have always regulated retail utilities. 203

In General Motors Corp. v. Tracy, the Court concluded a state’s legitimate204

interest in utility regulation outweighed the incidental burden on interstatecommerce of a tax law. A natural gas marketer challenged the law which gave205

sales and use tax exemptions to Local Distribution Companies (“LDCs”) and notto natural gas marketers. Because all LDCs were located in Ohio, General206

Motors claimed the statute was discriminatory. The Court held it was notbecause the LDCs and gas marketers served different markets. The health and207

safety interests of the state in delivery to natural gas customers was an obviouslylegitimate state concern. The Court, relying on Panhandle Eastern Pipe Line208

Co. v. Michigan Public Service Commission, noted:209

In view of the economic threat that competition for large industrialconsumers posed to gas service to small captive users, the Court againreaffirmed its longstanding doctrine upholding the States’ power toregulate all direct in-state sales to consumers, even if such regulationresulted in an outright prohibition of competition for even the largest endusers.210

Thus, the Court concluded that there was no discrimination or burden oninterstate commerce imposed by the preferential tax law.211

The electric retail reciprocity laws can claim a legitimate state interest in thehealth, safety, and welfare of its citizens. Even after retail competition begins,


212. See id. at 304-06.

213. Cf. Bennett Elec. Co. v. Village of Miami Shores, 11 F. Supp. 2d 1348 (S.D. Fla. 1998)

(noting that because garbage collection was traditionally a governmental or highly regulated

function, a city law controlling garbage collection was not discriminatory and passed the balancing

test).

214. See Arkansas Elec. Coop. Corp. v. Arkansas Pub. Serv. Comm’n, 461 U.S. 375, 384

(1983).

215. See George Sawyer Springsteen, Government Regulation and Monopoly Power in the

Electric Utility Industry, 33 CASE W. RES. L. REV. 240, 251-52 (1983) (explaining that territorial

restrictions imposed by state electric utility regulators have the effect of excluding all but a single

electric supplier from a specific territory).

216. See 16 U.S.C. § 824(a) (1994) (leaving the regulation of retail electric matters to the

states’ sole authority); id. § 824k(g) (leaving the regulation of retail marketing areas (or service

in-state utilities will be responsible for the delivery of electricity to in-stateconsumers. Thus, the state will continue to have a legitimate interest in theviability and profitability of in-state electric utility distributors. As the Courtnoted in General Motors Corp. v. Tracy, the economic threat that competition forlarge industrial customers poses to retail customers justifies a state’s regulationof retail electric sales to ultimate customers, even to the extent of prohibitingcompetition. The reciprocity requirements do not go that far; they simply212

require reciprocal access as a condition of competition. The reciprocityrequirement ensures that in-state utilities will remain viable and the health,safety, and welfare of the state’s citizens are protected by consistent andaffordable electric service.

The state retail electric competition plans and their reciprocity requirementsare legitimate areas of state regulation because the retail electric industry is ahighly regulated field, imbued with the public interest. 213

The FERC has not taken on retail competition and, in fact, is prohibited bythe EPAct from ordering retail wheeling, a necessary aspect of retail competition.Just as the FERC disclaimed jurisdiction over the rural cooperatives funded bythe REA, the FERC has disclaimed or been prohibited from exercisingjurisdiction over retail competition. There is nothing in the FPA that shows afederal intent to leave the area of retail electric energy unregulated because theFPA was created to fill a regulatory gap and not to create one. Thus, the states214

should be able to make laws affecting retail electric competition.If, in making those laws, the state incidentally affects interstate commerce

through a reciprocity requirement, the law should not be found to violate thedormant Commerce Clause. The putative local benefits of retail competition, andreciprocity in particular, outweigh any incidental affect on interstate commerce.In fact, the burden on interstate commerce is actually less under the Illinoiselectric restructuring Act then it was under traditional retail electric regulation.In a closed, monopolistic retail electric market, out-of-state utilities arecompletely banned from supplying electricity to in-state customers. Yet, the215

states are authorized by the FPA, as amended, to keep the market closed andprohibit out-of-state suppliers of electricity. 216


territories) to the states’ exclusive authority).

217. See Arkansas Elec. Coop. Corp., 461 U.S. at 395.


219. See id.

220. See id.

221. See id.

222. See, e.g., 220 ILL. COMP. STAT. 30/2 (West 1998) (declaring exclusive service territories

as in the public interest to avoid duplication of facilities and increase efficiency of the State’s retail

electric system).

223. See Arkansas Elec. Coop. v. Arkansas Pub. Serv. Comm’n, 461 U.S. 375, 377 (1983)

(noting that the regulation of electric utilities is one of the most important functions associated with

the police powers of the states); Springsteen, supra note 215.

It is possible that once the retail market is opened-up to out-of-stateelectricity, the market becomes an interstate one and thus, any trade barriers areprohibited by the Commerce Clause. However, even in a closed electric market,almost all electricity that is supplied to customers has some out-of-state powerintermingled. Thus, strictly speaking, even a closed retail market is an217

interstate market, yet absolute prohibition of out-of-state electric suppliers is stillpermitted.

Thus, the burden on interstate commerce the reciprocity requirementpromotes is minimal in relation to the local benefits the reciprocity requirementcreates. As such, the reciprocity laws would pass the less strict dormantCommerce Clause balancing test.

E. The Unique Nature of Electric Utilities

While the current construction of the reciprocity requirement may not passthe traditional dormant Commerce Clause challenge, there is strong reason fora court to consider the unique nature of the electric utilities when examiningretail electric restructuring laws. Arguably, traditional Commerce Clauseanalysis simply does not apply to this industry. There are three justifications forthe dormant Commerce Clause—historical, economic, and political.218

Historically, the Commerce Clause was intended to prevent a state from erectingtrade barriers that interfered with interstate commerce. Economically, the219

country is better off if there are no laws that impede the free flow of goods ininterstate commerce. The political justification is that citizens in one state220

should not be harmed by laws of another state where they lacked politicalrepresentation.221

Retail electric restructuring laws, particularly the reciprocity requirement, donot violate these justifications. The retail electric industry is controlled by statelaw. Traditionally, electric service has been a monopoly service with the stateassigning specific service territories for electric utilities in exchange for theelectric utility’s duty to serve the public. The ability of states to restrict222

competition in the area is not challenged, as confirmed by the FPA and policepowers of the states.223


224. See Springsteen, supra note 215, at 251-52.

225. See supra text accompanying notes 103-20.

226. See Indianapolis Power & Light Co. v. Pennsylvania Pub. Util. Comm’n, 711 A.2d

1071, 1079 (Pa. Commw. Ct. 1998).

227. Stranded costs are the costs electric utilities put into new generation and power supply

contracts in reliance on a monopoly market. When the monopoly status is taken away, most retail

electric restructuring plans allow utilities to recover at least some of these costs from ratepayers.

228. See Indianapolis Power & Light Co., 711 A.2d at 1075.

229. See id. at 1077.

Even though the electricity that comes into most homes and businesses iscommingled with out-of-state electricity, thus affecting interstate commerce,currently, the states still retain the power to limit competition in theindustry—erecting trade barriers.224

The purpose of state retail electric restructuring laws is to encouragecompetition in an industry that has always been a monopoly. These laws shouldbe encouraged because they are eliminating trade barriers and not establishingthem. The historical justification and the economic justification for the dormantCommerce Clause—to prohibit trade barriers and encourage the free flow ofgoods in interstate commerce—are actually promoted by retail electric openaccess laws. Also, the political justification for the dormant CommerceClause—that citizens of one state should not be harmed by laws of another statewhere they lacked political representation—is not found in these reciprocitylaws. The laws do not harm out-of-state citizens any more than the current anti-competitive laws that are within a state’s authority to enact. States should beable to add a reciprocity requirement so that the transition from monopoly tocompetition can occur safely and with minimal risk to the electric infrastructureand the safety and welfare of the state’s citizens.

The other reciprocity cases that were found to violate the dormant CommerceClause were trying to prohibit the introduction or exportation of products fromtheir states or were attempting to give local business a benefit. The reciprocity225

laws are doing neither. They are an attempt to encourage other states to opentheir retail electric markets, so that an otherwise closed market can becompetitive. The only recourse a state has to safely open its retail electric marketis to require reciprocal access to other markets. The in-state electric utilities arenot being specifically benefitted by the reciprocity laws; they are only preventedfrom harm by unfair competition.

A court made this argument when the Pennsylvania retail electricrestructuring plan was challenged as violating the dormant Commerce Clause.226

In Indianapolis Power & Light Co. v. Pennsylvania Public Utility Commission,IP&L challenged the plan’s stranded cost provision as a violation of the227

Commerce Clause. IP&L claimed that allowing the recovery of stranded costsgave in-state electric utilities an advantage over out-of-state electric utilities.228

The court found that the law did not violate the Commerce Clause because it didnot discriminate against interstate commerce and was strikingly unlike the lawsinvalidated by previous Supreme Court Commerce Clause decisions. The229


230. Id. at 1076 n.7.

231. See id. at 1077.

232. See id. at 1082.

233. See New Energy Co. v. Limbach, 486 U.S. 269 (1988); Great Atlantic & Pacific Tea Co.

v. Cottrell, 424 U.S. 366 (1976); see also supra notes 109-20 and accompanying text.

234. See Great Atlantic & Pacific Tea Co., 424 U.S. at 379.

235. See supra notes 215-16, 223.

236. See Order 888, supra note 56, at 31,635.

court noted:

[T]he statutes that were struck down by the Supreme Court involved thestifling of interstate commerce through local favoritism in then currentlycompetitive markets. The Competition Act, read in whole, invitescompetition into an industry that has been historically limited to state-regulated monopolies, and as such, it is so distinct from CommerceClause precedent that we must find that it does not involve theCommerce Clause. To hold otherwise would expand Supreme Courtprecedent . . . .230

The court claimed that the stranded cost provision was merely one elementof a planned move toward competition in an Act that is the antithesis of a statutethat discriminates against interstate commerce. Finally, the court argued that231

the Commerce Clause should not be used to hinder states in their attempt to bringcompetition into the electric industry, noting that the move to competition is anational trend and states should be encouraged to experiment.232

These arguments easily apply to retail electric reciprocity clauses. While thecourts have addressed the issue of state’s attempting to encourage other states toenact certain laws or policies and found those arguments unpersuasive, the233

courts have never dealt with a situation where a complete trade barrier existedand a single state was attempting to withdraw that barrier.

For example, in Great Atlantic & Pacific Tea Co. v. Cottrell, the Courtargued that the Commerce Clause itself provided the necessary reciprocity andthat if Mississippi thought Louisiana’s laws discriminated against interstatecommerce, Mississippi could sue. However, that option is not available to a234

state with a retail electric reciprocity law. Other states may completely bar out-of-state utilities from supplying retail electric service and because of the FPA asamended, the other states are not violating the Commerce Clause. 235

So, the Commerce Clause itself does not provide reciprocity in this situation.Furthermore, reciprocity is abundant in the electric and natural gas industries.Transmission reciprocity is required by the FERC for electric sales atwholesale. True and fair competition cannot occur in the electric generation236

industry without it. Eventually, the retail electric market in every state will beopen and reciprocity requirements will not be necessary. However, in thetransition, reciprocal access is necessary and fair.


237. See Victoria K. Green, Congress Looks to Next Session to Work on Plugging in

Electricity Restructuring, THE OIL DAILY, Nov. 4, 1998, available in 1998 WL 9212080, at *1.

238. See id.; see also Richardson Predicts Mandate Bill in ‘99, RESTRUCTURING TODAY, Oct.

29, 1998, at 3 (Energy Secretary confident that electric restructuring bill will pass in 1999).

239. U.S. Representatives Largent and Paxon proposed a draft bill similar to this approach

in 1998 and are expected to renew the bill in the 106th Congress. See Recent Legislative Activity

Indicates Push Is Still On to Restructure Electric Utility Industry During This Congress, FOSTER

ELECTRIC REPORT, July 1, 1998, Report No. 142, at 1, available in 1998 WL 7902285 [hereinafter

Push Is Still On].

240. See Electric Consumer Choice Act, S. 2187, 105th Cong. (1998).

241. See Nickles Introduces Restructuring Bill That Relies on Commerce Clause, ELECTRIC

UTILITY WEEK, June 22, 1998, at 6, available in 1998 WL 10046671.

242. See Push Is Still On, supra note 239, at 2.

243. See Federal Mandates on Retail Access Would Harm Consumers, Report Says, INSIDE

F.E.R.C., Apr. 14, 1997, at 4, available in 1997 WL 9127275.

IV. POSSIBLE FEDERAL SOLUTIONS, OTHER OPTIONS

Clearly there are many hurdles facing the states as they attempt to open theirretail electric markets to competition. An obvious solution to the constitutionalchallenges states may face is some form of federal action. The federalgovernment could enact legislation that makes it clear who has jurisdiction toorder retail wheeling and whether states have the power to require reciprocity.While the 105th Congress introduced fourteen electric restructuring bills, noneof them were considered. Yet, many in the industry are hopeful that the 106th237

Congress will finish the job. Following are several options awaiting238

congressional action.

A. Date-Certain Retail Open Access and Distribution Reciprocity

Federal legislation could mandate states to open their retail electric marketsto competition by a certain date. Congress would need to clarify the FERC’s239

role, perhaps by allowing it to order retail wheeling. Reciprocity could beallowed in the transition period, but would not be necessary once the date arriveswhen all states have open access.

Another Senate bill would write legislation that used the Commerce Clauseto keep states from discriminating against consumers who purchase electricity ininterstate commerce. Senator Nickles’ bill does not impose a federal mandate240

on the states, but the legislation has the same effect; all states must allow foropen access to retail customers or be faced with a Commerce Clause challenge.241

The bill takes away the state’s authority under the FPA to create and maintainutility monopoly franchises. However, the bill still allows states to requirereciprocity. 242

While such legislation could answer the constitutional questions raised bythis Note, there are political problems with mandating competition. Consumergroups complain a mandated deadline for states to open up retail markets couldharm consumers. States need flexibility so that consumers do not get stuck243


244. See id.

245. See Jost, supra note 67, at 58.

246. See Low-Cost States Say Feds Should Not Order Dereg, MEGAWATT DAILY, Dec. 14,

1998, at 1.

247. The low-cost states include: Alabama, Florida, Georgia, Idaho, Indiana, Kentucky,

Louisiana, Minnesota, Mississippi, Missouri, Montana, North Carolina, North Dakota, Oklahoma,

Oregon, South Carolina, South Dakota, Tennessee, Utah, Virginia, Washington, West Virginia, and

Wisconsin. See id. at 2.

248. See id. at 1.

249. See id. at 2.

250. See Green, supra note 237, at *1-2.

251. See Comprehensive Electricity Competition Act, S. 2287, 105th Cong. (1998).

252. See Push Is Still On, supra note 239, at 1.

253. See, e.g., S. 2187, 105th Cong. (1998); S. 722, 105th Cong. (1997); S. 1276, 105th

Cong. (1997); S. 1401, 105th Cong. (1997); H.R. 4715, 105th Cong. (1998).

254. See Restructuring Bill or Statement of Principles? White House Is Unsure, INSIDE

ENERGY/ WITH FEDERAL LANDS, Dec. 15, 1997, at 5, available in 1997 WL 9131516.

with paying for unreasonable stranded costs. If the open access date bargainingchip is taken away from states, utilities will be in a better bargaining position andretail customers could get stuck with an unfavorable plan.244

Another political consideration that Congress will need to recognize is thatretail electric service is the state utility commissions’ historical turf. Federal245

mandates may not be politically popular in all states, particularly cheapelectricity states. In fact, regulators from twenty-three low cost electricity246

states have asked Congress not to mandate restructuring for the electricindustry. The states claim that they are in the best position to decide when and247

how the retail electric market should be opened. The National Association of248

Regulatory Utility Commissioners (“NARUC”) agrees, claiming that statesshould have exclusive jurisdiction over retail electric competition.249

B. Clarifying States’ Authority While Not Requiring OpenRetail Electric Markets

A better option for Congress seems to be legislation that clarifies what statescan and cannot do to open their electric retail markets, while not requiring statesto open their electric markets. Several bills were introduced in the 105thCongress and are expected to be reintroduced in 1999 that take this approach.250

The Clinton administration bill is an apt example. The bill would allow251

electric consumers to choose their electric supplier by 2003. However, the billwould allow states to opt-out and keep the status quo or an alternative state-crafted plan. The bill, along with many others, would also allow states to252

require reciprocity.253

Many in the industry see this as an important function of federallegislation—ensuring that states can constitutionally require reciprocity.254

Elizabeth Moler, Department of Energy Deputy Secretary, noted that “[t]he best


255. Id.

256. See M. Bryan Little, Wheeling Reciprocity; By Checklist or Certification?, PUBLIC

UTILITIES FORTNIGHTLY, June 15, 1998, at 46.

257. See id.

258. See id.

259. See PETER L. STRAUSS, ADMINISTRATIVE LAW; CASES AND COMMENTS 10 (9th ed.)

(1995).

260. See Massey: FERC Should Consider Extending 888 to Retail, MEGAWATT DAILY, Nov.

10, 1998, at 3.

261. See id.

262. Id.

263. See Hoecker Creates Ombudsman Position to Coordinate State/Federal Policies,

FOSTER ELECTRIC REPORT, Dec. 17, 1997, Report No. 128, at 2, available in 1997 WL 10339976,

at *6.

we can do may be to recognize the authority of the state to decide . . . whetherthey want to limit the participation of utilities from outside their borders in theirstate programs if those utilities are not open.”255

Another practical solution Congress could pursue to ensure that states havethe authority to require reciprocity, if they so desire, is a reciprocity provisionthat contains a federal certification system. Utilities could be certified by their256

home states as a utility that allows alternative electric suppliers into its territory.Then, that certification would serve as a ticket for that utility to serve in otherstates who have open access. This approach allows states flexibility and can257

be done without drastically changing the federal/state jurisdictional roles, therebymaking it politically appealing. Any of the above federal alternatives that258

allow states flexibility is more politically likely to win congressional approval.

C. An Expanded Role for the FERC

Another possible solution to the jurisdictional and constitutional problemsfacing retail competition is for the FERC to expand its role now and haveCongress follow with appropriate legislation. Of course, the FERC as anadministrative agency is limited by the federal energy statutes. However, there259

may be ways for the FERC to increase its involvement in retail competitionwhile, technically, staying within those limits. The FERC’s CommissionerMassey claimed that the FERC should consider extending Order 888 to coverretail service. Cooperation between the FERC and the states could lead to grid260

regionalization through Independent System Operators or Regional TransmissionCompanies. Dialogue with the states is needed in the transition to competition,261

but Massey believes that “[i]f FERC does not lead . . . the transition could spurinefficiency.” With fifty states enacting various retail restructuring programs,262

the FERC argues that gaps will occur. The FERC’s Chairperson Hoeckersuggested that perhaps the FERC is in the best position “to address these gapsand to harmonize the power marketplace both vertically (state/federal) andhorizontally (state-to-state).”263


264. 434 U.S. 452 (1978).

265. U.S. CONST. art. I, § 10, cl. 3.

266. See United States Steel Corp., 434 U.S. at 471.

267. See, e.g., American Energy Solutions v. Alabama Power Co., 16 F. Supp. 2d 1346

(M.D.Ala. 1998) (challenge of stranded cost surcharge provision in electric restructuring law not

ripe for review until someone is charged the surcharge).

However, any action by the FERC, absent congressional approval, may beseen by the states as a co-opting of state authority. The same political problemsthat exist with a congressional mandate, exist with the FERC taking over.

D. Interstate Compacts as a Solution

Another option for Congress is to authorize the states to create interstatecompacts in the retail electric area. This option has the advantage of leaving thetough policy decisions of when and whether to open up retail markets to thestates. Several states in one region could consent to retail electric reciprocitythrough a compact. In fact, states may not even need congressional approval tocreate interstate compacts. In United States Steel Corp. v. Multistate TaxCommission, a multistate compact did not violate the Constitution’s Compact264

Clause even though it was not expressly authorized by Congress. The Court265

concluded that if an agreement did not diminish federal power or enhance statepower at the expense of federal power, then congressional approval was notnecessary. 266

Thus, an examination of the particular interstate compact would be necessaryto determine if federal power was being diminished. This would lead right backto the jurisdictional questions this Note examines. Another difficulty with suchan option would be gaining cooperation with states within a region. It makessense for states in close proximity to create an interstate reciprocity agreement,but these are the same states that are competing with each other for industrialloads, making common ground hard to find.

E. The Hold-Out Approach

A final option for states as they consider drafting retail electric restructuringlegislation is simply to install a long transition period. That way states can actnow to restructure the retail electric industry, but the constitutional issuesinvolved will not be immediately ripe for judicial review. By the time true267

retail electric choice occurs within the state, Congress will have acted, either togive the state the authority needed to proceed, or to mandate open access.

F. Should Retail Electric Reciprocity Be Required?

Now that the question of “can states do it?” has been considered, it is worthexamining the question of “should states do it?” A National Association ofRegulatory Utility Commissioners (“NARUC”) resolution states that Congress


268. See State Utility Regulators Do Not Believe Electricity Legislation, INSIDE

ENERGY/WITH FEDERAL LANDS, Aug. 18, 1997, at 5, available in 1997 WL 9131107.

269. See id.

270. See Craig S. Cano, Stranded-Costs Securitization, Reciprocity Draw State Regulators’

Eye, INSIDE F.E.R.C., July 28, 1997, at 9.

271. See In re the Restructuring of the Electric Utility Industry, 177 Pub. Util. Rep. 4th 201,

at 220 (Mich. Pub. Serv. Comm’n June 5, 1997).

should not require or even allow states to voluntarily require reciprocity. The268

resolution claims that retail electric reciprocity may reduce the choice of electricsuppliers. Thus, consumers will be harmed by the unavailability of the cheapestsource of electricity. Furthermore, with a reciprocity requirement states may269

have to become reciprocity police, presenting enforcement problems.270

However, states will require certification of electric suppliers regardless, andthe process of deciding if a certain supplier meets the reciprocity provision couldbe streamlined with the certification process. Also, reciprocity has an air of271

fairness to it. It provides a safe means for states to open their markets with theassurance that in-state utilities will remain viable. That closed state utilitiescould increase revenues by supplying electricity in open states, while maintainingtheir monopoly status in their home state, just does not seem fair.

CONCLUSION

States should have the power to order retail wheeling under the currentfederal energy laws. The federal government has not preempted such authority,although as a practical matter, federal/state cooperation may be needed to makeretail wheeling a reality. However, the four states’ retail electric reciprocityclauses probably do violate the dormant Commerce Clause using traditional strictscrutiny Commerce Clause analysis. Yet, if a reciprocity clause was drawn soas not to facially or effectually discriminate against interstate commerce, thensuch a clause would pass the traditional Commerce Clause balancing test.

Furthermore, there are real reasons that a unique form of analysis should beused for examining the electric industry. Retail electric open access lawspromote rather than impede interstate commerce in electric energy. As such,courts need to take the unique characteristics of the industry into account whenexamining retail electric restructuring laws. Perhaps, traditional CommerceClause analysis just doesn’t make sense in this newly competitive industry.

Finally, while there are many possible federal solutions to the issues thisNote raises, the best course is for the federal government to allow the states toperform their novel experiments in the retail electric industry. When necessary,the federal government should step in only to give states the authority needed toensure a fair transition to retail electric competition.

state electric restructuri ng are retail w reciprocity

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